I want to switch mortgage lenders—do I have to pass the stress test again?

Speaking at Global Risk Institute summit on Wednesday, Routledge said he was worried that the requirement by lenders to run the “OSFI stress test” is making Canadians feel the regulator is too directly involved in their affairs.

“If I were that person, I would feel regulated by OSFI. And that’s what we hear from Canadians. And I don’t think that was ever part of its intent.”

The concern helped lead to OSFI’s announcement last week that starting Nov. 21, it would no longer require a stress test for uninsured mortgages when borrowers are making a straight switch between lenders, meaning they aren’t changing things like their amortization or borrowing amount.

Only between 2% and 6% of borrowers make such a switch, so while it was something Routledge previously maintained was part of sound underwriting practices, the agency no longer saw it as worth the cost. 

“It wasn’t a big enough prudential risk to justify that appearance of unfairness,” he said.

Why OSFI decided to change the stress test

The removal of the stress test requirement comes as the regulator is also looking at a broader switch away from the B-20 stress test on individual borrowers, to a system that would regulate mortgage risk at a bank portfolio level.

The regulator will next year be testing the alternative system, which sets limits on how much of a bank’s loan book can be taken up by borrowers with a high loan-to-income ratio. The regulator will then decide whether to add it to the current mortgage rules, or replace the existing stress test.

While the new system would similarly limit concentration of risk, or even do a bit of a better job, it would also have the benefit of seeming to be less directly applied at the specific borrower level, said Routledge.

“I think OSFI will sacrifice less confidence and credibility if we stick to our knitting, and only deal with the financial institutions as opposed to being perceived to deal with individuals.”

Change follows new mortgage rules

OSFI’s decision to relax its mortgage rules came shortly after the federal government also eased lending rules, including increasing the price cap on insured mortgages and expanding eligibility for 30-year amortizations. But Routledge said that he felt only public, not political, pressure to make the change.

On the wider mortgage changes announced by the government, he said they amount to a modest increase in risk, but he doesn’t think it’s material to the near- or long-term prudential health of the banking sector. 

The mortgage changes come as overall, the risk outlook for Canadian residential lending sector is looking much better than it was a year ago, said Routledge.

“We have seen some deterioration but has been very gradual and quite manageable … all the evidence right now is that households have managed through this quite well.”

Read more about mortgages:

• The complete guide for first-time home buyers in Canada
• The best 5-year fixed mortgage rates in Canada
• The best 5-year variable mortgage rates in Canada
• Mortgage affordability calculator

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